CHOW SANG SANG COMMODITIES LIMITED v. HO KAM TIM AND ANOTHER

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

ORIGINAL not of to be removed.

Case: 1987, Nos. A7379 and A8043

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JUDGMENT

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1. In both actions, the Plaintiff applies for summary judgment. The applications were heard at the same time because the pleadings, and the issues arising from them, are essentially identical.

2. The stories that emerge are familiar: They tell of two more personal financial disasters arising from speculation in Hang Seng Index Futures and the stock market crash in October, 1987. The stances taken by the two Defendants are also familiar: A search for any possible defence that will enable them to avoid the large losses they incurred when they sought to make great profits from their speculations. Their moral responsibility for the amounts claimed by the Plaintiff, which are the losses incurred when the market went wrong for them, may be clear, but that does not debar them from resisting the claims if there is any legal basis on which they may do so.

3. The Defendants appeared before me in person, but their pleadings were drawn by their former legal representatives. The matter was not, therefore, fully and properly argued before me on behalf of the Defendants, and I am conscious of the need to be careful not to deprive the Defendants of a trial because I was not convinced by their efforts to present their cases without expert assistance.

4. The Plaintiff's claims are based on Customer's Agreements, in terms of which the Plaintiff maintained accounts for the Defendants for trading in commodity futures. The agreements obliged the Defendants to maintain minimum margins on the accounts and, if they failed to do so, the Plaintiff was entitled to liquidate contracts and hold the Defendants liable for any loss. The Plaintiff says that the Defendants did fail to maintain the margins, that it liquidated the contracts and that substantial losses were incurred.

5. As their first line of defence, the Defendants say that, although they signed the agreements, they were not given copies and were not given a reasonable opportunity of reading them. They also say that the agreements were not interpreted or explained to them. They allege, further, that Mr Szeto - who calls himself Mr Seeto - an employee of the Plaintiff, led them to believe that their liability was limited, in the case of the Defendant Mr Ho, to 25% - 30% of his margin deposit or deposits and, in the case of the Defendant Mr Li, to 25% of his margin deposit or deposits, and that this limitation of loss would be achieved by the Plaintiff liquidating the Defendants' positions if the market moved against them to the appropriate degree, unless the Defendants agreed to make further margin deposits. The Defendants say that they executed the agreements relying on the truth of this representation, and that the Plaintiff had a fiduciary duty to explain the agreements to them; particularly that they were liable for losses beyond their deposits.

6. The allegations I have outlined above emerge from proposed amended defences. In the original defences dated 5 January 1988, the allegation is that the loss was limited to the whole of the margin deposit, not a percentage of it. In an affirmation dated 16 January 1988, Mr Ho made the same allegation regarding his loss being limited to the whole of his margin deposit. In this affirmation, Mr Ho also maintained that it had been represented to him that the agreement he signed was "only an account opening form". This allegation does not appear in his amended defence. In subsequent affirmations, both Defendants say that the original defences were wrong because their solicitors used standard defences for a number of clients in similar situations. It must be said that these defences do appear to have been prepared with blanks to be completed appropriately - not a very wise practice. Mr Ho does not explain why his affirmation was incorrect, or why he does not persist in his allegation regarding the misrepresentation as to the nature of the document he signed.

7. It is difficult to know what is intended by the present main defence. It has elements of allegations non est factum, misrepresentation and breach of fiduciary duty rolled up in one statement of defence.

8. A plea of non est factum must fail because the Defendants do not now suggest that they did not know the nature of the agreements. Indeed, the tenor of the amended defences indicate that they knew the nature of the agreements to which they became parties; they were, they say, misled as to their effect on the matter of potential loss.

9. As to the allegation of a misrepresentation, the substance of this is that, before the Defendants executed the agreements, Mr Seeto told them that the effect of the terms of the agreements relating to their financial exposure was other than they were according to the agreements themselves.

10. If the Defendants were to say that the terms of oral agreements they entered into with the Plaintiff were different from the terms recorded in the agreements that they signed, this would, in the circumstances of this case, avail them nothing. They would not be heard to set up a term of a prior oral agreement inconsistent with the terms contained in a written agreement signed by them. It would be strange if the Defendants could get around this difficulty merely by suggesting that they were not alleging prior inconsistent agreements, but representations by the Plaintiff as to the effect of the agreements which were inconsistent with the effect of the written agreements entered into by them and which they had the opportunity of ascertaining were so inconsistent.

11. The agreements, which were in English and Chinese, made it perfectly clear that potential losses were unlimited and could be substantial. This warning was repeated in a risk disclosure statement signed by the Defendants.

12. The Defendants should be taken to be bound by the agreements they executed, and I would have thought that any plea that they relied upon a representation as to the effect of the agreements, which amounts to a representation of law and which was different from the real effect of the executed agreements, would not be a good defence in law. If the Defendants had bothered to read the agreements they were undertaking, they could have been in doubt as to their true positions, and they would also have known that there could be no oral variation of the agreements.

13. Contrary, however, to my initial view, I find that there is authority for the proposition that a misrepresentation as to the effect of a document may be founded upon as a defence. They are authorities that I feel I should follow in the absence of full argument on behalf of the Defendants. These authorities are Hirschfeld v The London, Brighton, and South Coast Railway Company (1876) 2 QBD 1 and De Tchihatchef v The Salerni Coupling Ld. 1932 1 Ch. 330 (in which the point was taken by way of estoppel).

14. I do not know what conclusion it is suggested should be drawn from the allegations that the Plaintiff had a fiduciary duty to explain the terms of the agreements to the Defendants. Whatever this might be, it is clear that the parties to these agreements were acting at arm's length, and that there was no pre-existing relationship between them from which one could infer a duty on the Plaintiff to act with special regard to the interests of the Defendants. The agreements were ordinary commercial arrangements in respect of which both parties stood on an equal footing. I cannot find that there is any basis for suggesting a fiduciary relationship between the parties.

15. The Defendants go on to allege that the statement regarding the limitation of their liability was a collateral warranty or representation in respect of which the Plaintiff is liable to the Defendants in damages in the same amounts as the Plaintiff's claims, and the Defendants will seek to set off these damages against those claims.

16. In my view, the Defendants cannot be heard to plead a collateral warranty as to a limitation of liability which is, admittedly, inconsistent with an express term of the agreements.

17. As to the claim for damages for negligent misrepresentation, this is again based on an alleged mis -statement of the effect of the written agreements placed before the Defendants for execution. Although it may be that a misrepresentation by a party as to the contents of an agreement may found an action or a defence against that party, I am doubtful that any reliance can be placed on an alleged misrepresentation as to the legal effect of an agreement; particularly where that represented effect is clearly contrary to the plain terms of the agreement. Because, however, of the authorities I have mentioned above I cannot find that the matter is not arguable.

18. Similar allegations are made by the Defendants that the Plaintiff had a duty or a collateral contractual obligation to liquidate the Defendants' positions when the futures index moved against the Defendants to the appropriate degree.

19. It is impossible to find such a duty or collateral contract in the circumstances of this case. The Plaintiff was acting as a broker in a market in which essentially, something is bought and sold. If the Defendants instructed the Plaintiff to sell, it could not do so unless it found a buyer. In this situation, it cannot be accepted that the Plaintiff had any absolute obligation to sell contracts behalf of the Defendants in any particular set of circumstances. In the agreements, the Defendants acknowledged that "Under certain market conditions, I understand that I may find it difficult or impossible to liquidate a position.".

20. A further plea by the Defendants is, in substance, that the Plaintiff had some kind of duty to act in the interests of the Defendants over its own interests and those of other clients, and that it failed to do this. Indeed, it is this point that the Defendants, almost exclusively, urged upon me at the hearing. They suggested that the Plaintiff should have favoured one class of client over another when seeking to allocate whatever market was available; perhaps to those who were looking to "hedge" their positions, or to those who were more exposed than others.

21. I cannot find any such duty on the Plaintiff as a matter of law or commonsense. Such a duty would put the Plaintiff in a impossible situation, and would involve a finding that the Plaintiff was bound to act judicially in allocating whatever share of the market was available according to competing claims. There is, of course, no need, as a matter of commercial expediency, to import such a duty in the relationship between the parties. It was always as much in the interests of the Plaintiff as the Defendants to restrict the losses of the Defendants as far as possible. There is no such duty to be found in the agreements between the parties.

22. The Defendants further allege that the Plaintiff cannot sue because the transactions were gaming contracts. This plea has been rejected in similar circumstances in Richardson Greenshields v Keung Chak Kiu Case No. 1988, CL 51, and I follow this decision.

23. Frustration is also raised as a defence by the Defendants. It is said that the suspension of trading was "illegal and/or void and unenforceable". In essence, this aspect of the matter has been settled in a judgment by Sears J. on 2 February 1989 in the Richardson Greenshields case, and I see no reason to differ from that decision.

24. In the result, I find that the only defence raised by the Defendants that is arguable is the allegation of the misrepresentation. I am very suspicious of the factual veracity of this allegation, but I cannot decide that it is so improbable that I should deprive the Defendants of the opportunity of establishing it at trial.

25. I am inclined to believe that the defences raised in these cases have little chance of acceptance, and it is in no one's interests that the matters should drag on any further. On the other hand, it is a serious step to take away from a party the chance to prove his case at trial, and I do not think these are cases in which I should do this. I would, however, urge the Defendants to reconsider their positions carefully in the realisation that costs are mounting up and taking into account the fact that I believe that a court would find it hard to accept their version of the facts on the probabilities.

26. I have considered whether I should give conditional leave to defend, requiring the Defendants to provide security, but I have rejected this on the basis that it is likely that they could not provide this and such conditional leave would amount to a refusal of leave.

27. Accordingly, I give the Defendants leave to defend the actions and make an order nisi that costs be costs in the cause.

28. The Defendants had two summonses before me on 11 September. These summary judgment. They now arise for consideration, and are adjourned to a date to be fixed by the Listing Officer.